I guess the main action for 2016 is already ongoing even
as I start this prediction on the 11th of Jan 2016. We start the new
year on a very somber note. A global recession is at hand and despite
the expectation that India can easily avoid the recession and be an
island of growth, a reality check shows that because of continuing
governance failure, India’s bright future is now dimmed and it will
suffer the malaise which will affect the rest of the emerging markets –
but starting from a much lower level of development (backwardness).
Science: The developments in solar and battery technology will now falter since price of energy is too low. A saturation point in internet- computer -mobile computing has been reached. The significance of this is mainly economic . The masses are consuming mobile computing on a massive scale, and further developments will simplify the ease of living of the masses. But this ease of living means that there will be no value for the efforts of human labour and so the earnings of the masses will keep on decreasing.
The cost of any new dramatic developments in technology will be high and the masses will find it impossible to consume the newer technologies. So the world will split among the haves – who will have the current mobile technologies as well as the newer ones – and the have nots who will only end up consuming the existing mobile technologies but be unable to consume the newer expensive technologies.
The main newer technologies will be in biotechnology. These are human labour intensive, require great periods of training and also need massive capital expenditure. The benefits of newer vaccines might accrue to the masses – since diseases like Dengue are a public health menace – but others like gene therapy, cosmetic and genetic enhancements by various methods, newer treatment modalities like growing designer organs for replacements, immune modulation therapies and the like – which will revolutionise further the treatment of many diseases – will be available only to those who have the money. Most of these will be technologies which cannot be replicated by breaking patents because of the enormous capital expenditures involved – there is a price moat protecting these tachnologies.
This changing trend in technology will cause an inversion of pay structure. Currently the computer technologist earns about double the salary of a biotechnologist after half the period of training. In future, the biotechnologist will earn double of a computer technologist (whose salaries will fall) even as their period of training increases further. Currently the period of training for biotechnologist is 10 years but the salaries are no different or less than computer scientists. This period will stay as such (with more involvement in handling newer machines )- but salaries will increase a lot. The biotechnologist of the future will need to be much better at computer software usage but require far greater analytical skills than presently seen among biotechnologists.
USA
Republicans seem set to lose the elections. Donald Trump is the worst self goal possible. He attracts the existing committed Republican vote but swings all others towards democrats. Disaster. I expect the Democrats to win. Probably Hillary will win the nomination since she will get the women vote – existing democrats plus women across parties is a winning combination. A win of the Democrats mean that India US relations will remain in limbo. There will be no strategic partnership. There will be no commitment against ISIS and Taleban. Economic policies should be same as currently.
Under Dems, the Fed is unlikely to raise rates (easing is the democrat tradition). Also in an election year the Dems will not want to offend the voters by sparking a sharp recession and so Fed should hold steady and not increase rates as currently expected.
Dems will raise taxes and this should drive away a lot of businesses. A lot of that capital might find its way into India.
Attempt at healthcare reforms might push health pharma capital into Switzerland Germany and Singapore. So the healthcare system in USA might deteriorate while the rich fly to Switzerland for treatment.
Immigration rules should remain tight.
Overal USA will be in a recession. Business will tread water for one year as the direction and strength of the recession is assessed.
Predictions for US:
Short term rates 0.25-0.5% i.e no rate increases from Fed.
10 year yield 2.0 to 2.5% i.e. same
Dow 16000 to 18000 i.e no change.
Real estate stagnant
Rents stagnant
Oil 25-40$ i.e. no change
Gold 1000 to 1200 i.e. no change.
Dollar Index 100 i.e no change
The possibility of a currency war with China depends on the election results and so we can forget about it for one year. If the Republicans win then by 2016 end an active currency war with Fed rates at 1.5%, 10 year at 4%, dollar index at 120 or above and a stocks collapse to below 15000 will be on the cards. Weapons manufacturers will however see a bull run. Oil will collapse further and so will oil stocks. By the end of the year the oil companies will anyway be in dire straits with no scope for improvement as the global recession proceeds. So the republicans will shift from oil funding to arms manufacturer funding mandated economic policies. That means aggressive action against the Russia China NKorea Iran Shia Axis and possible Indian Ocean Treaty Alliance (IOTA) as they spark off a new cold war with the proxy war being the Sunni Shia war. India will have to chose sides – and will get aggressively wooed into the IOTA. It means joining the Soudi and abandoning the Iran side. China can expect a walloping from Republicans.
But if Democrats win, which is likely, then the chances of such a currency war are less. However, sharp movements of the dollar index and Fed rates after elections are likely even with democrats and hence all predictions for US are for before the elections. After the elections it will be a whole new world. If Dems win, then expect increased protectionism, and cooption of Pakistan into the new IOTA (excluding India). Dems will go for a more sophisticated policy than the with us against us kind of Republican policy. They will try to influence Iran without abandoning the Obama treaty, mix up India and Pakistan in a tangle, try to engage China in a more complex trade alliance and win win situations, as well as spend money more on health than on armaments. In such a situation, the Chinese side will gain more and more strength and wily players like Pakistan will gain more than stupid countries like India. The remarkable restraint shown by Obama with the Russians will continue in an attempt to wear out the Russian economy.
Its all based only on elections. I expect Democratic win.
UK. The euro vote is again crucial to decide on what will happen. Economics is now irretrievably mired in politics and all predictions are off until the vote is in. I expect that UK will not join the Euro and will ply its course with greater link to the Americans rather than Euro. Current problems seen in Euro zone do not inspire condifence and the English are far too clever to seek short term gain with long term pain. Present course of staying aloof with independent currency has worked beautifully for them and I see no reason why they will change plans.
Europe.
Euro QE to continue. Rates remaining low to negative. Economy middling.
Bund 0.5 to 0.8. Dax 9000-12000
UK 10 year Gilt 2%. FTSE 5500-6500
Euro static
Japan static with Nikkei 17000-20000 and static Yen
China
This is a big problem. The outcome depends on whether there is active currency war with USA or not. I expect 60% that China will prefer not to rock the boat. But 40% they might. It all depends on how the Shia Sunni war plays out. If the Russia China Shia Axis takes off exponentially, with Assad destroying all opposition and taking over the rest of his country and the Iraqi forces shifting allegiance to the Shia Axis – and conquering the Sunni areas – and the Kurds remaining strong and weakening Turkey – then USA will unleash its currency war (mainly if Republicans win). Aggressive Fed tightening will push dollar index to 150. Yuan will collapse to below 10 to the Dollar. Ruble will collapse. Oil will be less than 20 dollars. Gold will be at below 800. China and Russia will go into a bad recession. A proxy war with higher US commitments will attempt to push back the Shia Axis starting off the Second Cold War.
If China prefers not to rock the boat, we will still see a few banking failures, Chinese recession, Yuan weakening to about 7.5 at least if not more and major economic disruption. Chinese stocks falling or flat, real estate falling or flat, yields falling.
Predictions based on Democrat win and a sedate Chinese policy are:
Shanghai Comp 2500 to 3200
HangSheng 18000 to 22000
Chinese short term rates 3 to 5%
Yuan 7 to 7.5 to the dollar
Gulf
Gulf will be in recession. This will have major consequences for Indian Expats. A lot of them will return while the outflow will reduce. Countries like Dubai and Abu Dhabi will see expansion of non oil economy and hence emigration might stay high but Saudi, Iraq, Kuwait, Oman, Iran will send back a lot of people. Their return will boost India’s local economy.
The gulf Shia Sunni war will continue. Already Saudi are offering undercut oil to Iranian customers. A proper treaty alliance of India with Saudi under American guarantee is the correct step in trade policy – India should abandon Iran and go with the American policy. However if it persists with Iran or tries to make Chanahar a go without American help – then our foreign policy is doomed and we wont gain anything but lose our expat remittances.
I expect a major rout for the ISIS by middle of 2016. Basher Assad will emerge victorious. A major Iraq problem between Americans and Shias is likely after that – I expect increased Chinese presence in Iraq, increased Russian presence in Syria and a loss for the American Saudi efforts. However, despite this, for trade benefits India should side with Americans and Saudi because maximum expat workers are in Sunni lands. It is time to get decisive and chose our friends properly with military cooperation treaties.
India
Politically, all depends on Republican vs. Democrat win.
Possibility of India joining the Transpacific partnership increasing. Modi will definitely join the US in any Cold War 2 under Republicans. But if the democrats win I don’t see much progress in any Indo US alliance.
The possibility of the Indo Gulf Trade Federation is in ruins due to the Shia Sunni war. If Cold War 2 develops, then Indian Ocean Treaty Alliance as a counter to the Silk Route is possible. India under Modi will definitely join any such allicance despite opposition from communist congress socialists etc.
Indian Internal Politics: Nothing much
Indian Economy. The govt has not demonstrated capability in economy management. Middle of the road performance is all we can expect. Optimistic expectations are dead.
Tax cuts: Jaitly will reduce 1% at least since he has given road map. However I am not hopeful of any roll back of cess or Petrol excise duty. No question of aggressive tax cuts in this regime.
Disinvestment: Low expectations. Most commodity companies will get low valuations under such recessionary conditions. Govt is now in a strait jacket. They did not sell when they could and now it is not possible to sell.
RBI. I expect Rajan to be replaced. I do not expect more than 0.25% cut from Rajan until he goes. We can however hope for two 0.25% rate cuts after he has gone after Sept 2016 until Jan 2017.
10 year gilt 7% is ideal but I expect 7.25 by year end at least.
Rupee. Slow depreciation in line with dollar index. I expect at least 70 to the Dollar prior to the US election results. After that depends on results.
Real Estate. Current prices will stagnate. Select locations should see firming up of prices. Mainly commercial office plates should show good performance. Most real estate companies likely to focus on commercial rather than residential. Top location for performance by commercial realty will be in Mumbai, Chennai and Gurgaon. Within Mumbai, commercials will do well in peripheral locations like Thane and New Bombay.
Residential will see stagnation. Best performance will be in Mumbai and Chennai. Bangalore will stagnate. Gurgaon will stagnate or fall a bit in SPR and GCX since prices already quite high and increased supply will continue. NOIDA should fall a bit too as the increasing deliveries add to supply.
Within Mumbai, the best performing residential location will be Bhandup, Kanjurmarg, Chembur, Thane.
New Launches: No new locations will come up. Launches in the peripheries of Mumbai will keep happening with a few projects every six months. NOIDA, Gurgaon and Bangalore will see very few launches and only existing inventory will keep changing hands.
REITS: There is a 50% change of tenement REITS getting formed this year in Mumbai MMR under new govt. This possibility is increasing because the economic conditions demand it and industrial revival without solving housing problem is impossible. The Panvel New Airport region might form the nucleus of this policy for tenement REITs.
Real estate investors should look at private equity in commercial realty. If Tenement REIT gets formed it is second best investment. New investments in residential should be avoided if possible, but if one has to make them, best location is Mumbai and Chennai. Areasof Mumbai I have already listed. Expected returns from property investment are nil in 2016 since prices will stagnate but it is a good entry time for long term investors for 10 to 15 year hold times.
Real Estate Long Term: In view of governance failure, expectations from stocks are getting lower. In such a situation, real estate is becoming a better investment destination than it was in 2015. A lot of people have burnt their hands with stocks in 2015 and these people are likely to view a return to their favourite investment destination of real estate in favourable light. In view of expected currency depreciation in long term – again, real estate is becoming more attractive. In dollar terms we have already seen a 15% fall in prices. Another 15% fall in dollar terms will again make NRI look to real estate. A lot of Gulf people will return and this will boost prices in Mumbai in long term of 3-5 years as finance pros return from Gulf.
Stocks:
The real question for 2016 is FD or stocks. In 2015 I voted for stocks and was wrong. In 2016 I again vote for stocks but with lesser margin of conviction.
Equities need four things to perform – 1. Rate cut 2. Tax cut 3. Disinvestment 4. Investment led growth with deficit financing.
Rate cuts do not look possible from Rajan but might come from his replacement. As the recession takes off, situations might get alarming. A clever governor would have seen the alarming conditions and anticipated it. Unfortunately we are cursed with this Rajan who is unable to see anything. So after the next quarter results which are likely to be very very dismal, he might be forced to cut rates – but only another 0.25% is likely. It is perhaps better that he doesn’t cut early and then is forced to cut in a big way with 1% reduction. Otherwise the peanuts offered up by 0.25% will be too inadequate to make any difference. It is important to realize that the NPL situation of banks and loan defaults by infrastructure companies is the fault of the RBI. These loans were taken when the RBI had lowered rates. Obviously if people take loans at 7% and then RBI demands 14% interest on that loan – nobody can make enough money to pay such high rates. The solution for the NPL problem is therefore with RBI. If it lowers the rates, exact same loan will start performing again. Banks will be out of trouble, companies will be out of trouble and the country will be back on the path of growth. It is wretched and perverse of the RBI to screw people who were not responsible for the problem – RBI itself is responsible for he problem. Just because of a few bad eggs gaming the system, RBI is throwing the baby out with the bathwater. However it seems unlikely that RBI will mend its ways unless a much worse crisis arrives – or if Rajan is replaced.
Tax cuts also seem impossible from Jaitley. He seems determined to push us into recession – with govt that says it will spend but only on roads which give results after 5 years – and taxing us into a recession to do so. Power we are already in surplus – we produce more electricity than the Indian people have money to buy – so until Indians get jobs and improve productivity, they cannot consume what we already produce. How can we get jobs unless govt cuts taxes? Repeatedly the excise duty on petrol is being jacked up. Instead of giving money to the people by petrol price cuts, which will boost demand elsewhere – govt is eating the money with nothing to show for it.
If all our corporate keep bleeding like this – how will we grow? There will be nothing to tax – govt should have been spending more, but by deficit financing and not by such high taxes. Without tax cuts, there is no hope.
Disinvestment. The purpose of divestment is to jettison already running companies to free up capital for new companies – until govt understands what is disinvestment, it will never do it properly. Air India is already existing. Sell it. Use the money to set up a new tier 3 city airline – we will have 2 airlines then instead of one, both Air India and the Tier 3 airline – then sell the tier 3 airline and make some other (say airport) company. That is the way to incubate start ups via govt – set up the company, sell in capital market, re-use the capital for a new start up – and govt start ups can be in big scale unlike privately funded start ups – but govt is not seeing any of this. Allow private trains by demerging the railways, sell BSNL and MTNL, sell all PSU, sell HPCL BPC, use the money to set up other companies – LNG terminals, gas pipelines etc etc. All of this will increase the amount of useful things in the country which is what growth means – more airlines, more trains, more roads with more cars. By this rationale, govt should sell at whatever is going price regardless of valuation. The commodity companies are already in the crapper and now better valuation is not possible for next 3 years. So govt should sell now – valuations be damned. But govt is trying to time the market – Jaitley has no vision.
So far the govt has shown no sign that it understands what is disinvestment. It seems straight jacketed by Swadeshi Jagran Morons of the RSS types. So any expectation of good things from Modi govt should be muted.
Investment led growth is now the main way to grow and not consumption led growth. Current 7% (or 5% old) growth rates are the best that can come from consumption led growth. So investment needs to be wooed. Peculiar pollution laws based on nonsensical understanding of automobiles, telecom law problems etc are keeping away private investment. Govt investment is too slow in take off and will not translate into results for many many years and it is unidimensional into roads.
So on all 4 main parameters on which growth for Indian economy is based, govt and regulators are found wanting. Expecting miracles from such useless managers is futile. Best we can hope is that by hit and trial and learning by burning their fingers and other body parts again and again and again, finlly these jokers will hit on the right recipe after 1 or 2 or 3 years. In other words a repeat of the Vajpayee years where the learning curve was very very steep and only in last year was India Shining.
My predictions for India Economy and markets by Dec 2016
1. RBI rates 6% with 0.25% from Rajan and 0.5% from his replacement
2. Long term 10 year yield 6.5 to 7%
3. Economic growth 5-6% only (based on new numbers) and based on poor results from commodity companies and real estate
4. Tax rates (corporate) cut by 1% in budget 2016
5. Petrol excise kept high
6. Infrastructure companies middling performance based on capital inadequacy to take on new road projects
7. Disinvestment target met – 20,000 crores only for next FY
8. Sensex 35000 (if tax cuts and rate cuts materialize as expected above)
9. Nifty 10,000 based on same premise.
10. Higher Nifty and Sensex if tax cuts more than expected.
11. If rate and tax cuts are less than expected then flat markets.
12. Real estate stagnant
13. Gold 25000 around about
14. Rupee 67 to 70 to the dollar
All predictions are to be seen at the time of US elections and not for calendar year end – since that event carries great significance.
Asset of the decade (2016 to 2026) = Stocks
Asset to avoid for the decade = Gold
FD and Real estate should be middling to OK
Asset of the next 5 years = stocks
Asset to avoid for next 5 years = gold
FD and real estate should be OK
Asset for the next year = Stocks and FD (close call)
Asset to avoid for next year = gold and real estate
Asset allocation to aim for is Stocks 60%, FD 20%, Real estate 20%
Incremental earnings coming during 2016 targetted for savings (for existing portfolio of whatever composition) can go to 50% stocks and 50% FD for conservative investors and 100% stocks for aggressive investors.
Existing portfolio – hold real estate. Hold stocks. Maturing FD can be put into stocks especially after market finishes falling. Gold can be sold if not already sold.
Equity model portfolio remains largely same as last year except replace BSL global real estate fund with ICICI FMCG Fund (to increase focus on FMCG esp ITC which is 40% of the fund)
Portfolio recommendations for 2015 to 2018 (4 year recommendation and 4 year hold)
Size of portfolio 100
1. PPF 10 (NAV on 1.1.15 = 10)
2. FMP 10 (NAV on 1.1.15 = 10)
3. Direct equity 25
a. Pidilite industries 5
b. HDFC bank 5
c. Asian paints 5
d. Ramco cement 5
e. LIC housing finance 5
4. Funds 55
a. Franklin bluechip 10
b. UTI opportunities 10 (on performance watch for 2016)
c. BNP midcap 10
d. Franklin smaller companies fund 10
e. Reliance pharma 5
f. Franklin infotech fund 5
g. ICICI FMCG Fund 5
Science: The developments in solar and battery technology will now falter since price of energy is too low. A saturation point in internet- computer -mobile computing has been reached. The significance of this is mainly economic . The masses are consuming mobile computing on a massive scale, and further developments will simplify the ease of living of the masses. But this ease of living means that there will be no value for the efforts of human labour and so the earnings of the masses will keep on decreasing.
The cost of any new dramatic developments in technology will be high and the masses will find it impossible to consume the newer technologies. So the world will split among the haves – who will have the current mobile technologies as well as the newer ones – and the have nots who will only end up consuming the existing mobile technologies but be unable to consume the newer expensive technologies.
The main newer technologies will be in biotechnology. These are human labour intensive, require great periods of training and also need massive capital expenditure. The benefits of newer vaccines might accrue to the masses – since diseases like Dengue are a public health menace – but others like gene therapy, cosmetic and genetic enhancements by various methods, newer treatment modalities like growing designer organs for replacements, immune modulation therapies and the like – which will revolutionise further the treatment of many diseases – will be available only to those who have the money. Most of these will be technologies which cannot be replicated by breaking patents because of the enormous capital expenditures involved – there is a price moat protecting these tachnologies.
This changing trend in technology will cause an inversion of pay structure. Currently the computer technologist earns about double the salary of a biotechnologist after half the period of training. In future, the biotechnologist will earn double of a computer technologist (whose salaries will fall) even as their period of training increases further. Currently the period of training for biotechnologist is 10 years but the salaries are no different or less than computer scientists. This period will stay as such (with more involvement in handling newer machines )- but salaries will increase a lot. The biotechnologist of the future will need to be much better at computer software usage but require far greater analytical skills than presently seen among biotechnologists.
USA
Republicans seem set to lose the elections. Donald Trump is the worst self goal possible. He attracts the existing committed Republican vote but swings all others towards democrats. Disaster. I expect the Democrats to win. Probably Hillary will win the nomination since she will get the women vote – existing democrats plus women across parties is a winning combination. A win of the Democrats mean that India US relations will remain in limbo. There will be no strategic partnership. There will be no commitment against ISIS and Taleban. Economic policies should be same as currently.
Under Dems, the Fed is unlikely to raise rates (easing is the democrat tradition). Also in an election year the Dems will not want to offend the voters by sparking a sharp recession and so Fed should hold steady and not increase rates as currently expected.
Dems will raise taxes and this should drive away a lot of businesses. A lot of that capital might find its way into India.
Attempt at healthcare reforms might push health pharma capital into Switzerland Germany and Singapore. So the healthcare system in USA might deteriorate while the rich fly to Switzerland for treatment.
Immigration rules should remain tight.
Overal USA will be in a recession. Business will tread water for one year as the direction and strength of the recession is assessed.
Predictions for US:
Short term rates 0.25-0.5% i.e no rate increases from Fed.
10 year yield 2.0 to 2.5% i.e. same
Dow 16000 to 18000 i.e no change.
Real estate stagnant
Rents stagnant
Oil 25-40$ i.e. no change
Gold 1000 to 1200 i.e. no change.
Dollar Index 100 i.e no change
The possibility of a currency war with China depends on the election results and so we can forget about it for one year. If the Republicans win then by 2016 end an active currency war with Fed rates at 1.5%, 10 year at 4%, dollar index at 120 or above and a stocks collapse to below 15000 will be on the cards. Weapons manufacturers will however see a bull run. Oil will collapse further and so will oil stocks. By the end of the year the oil companies will anyway be in dire straits with no scope for improvement as the global recession proceeds. So the republicans will shift from oil funding to arms manufacturer funding mandated economic policies. That means aggressive action against the Russia China NKorea Iran Shia Axis and possible Indian Ocean Treaty Alliance (IOTA) as they spark off a new cold war with the proxy war being the Sunni Shia war. India will have to chose sides – and will get aggressively wooed into the IOTA. It means joining the Soudi and abandoning the Iran side. China can expect a walloping from Republicans.
But if Democrats win, which is likely, then the chances of such a currency war are less. However, sharp movements of the dollar index and Fed rates after elections are likely even with democrats and hence all predictions for US are for before the elections. After the elections it will be a whole new world. If Dems win, then expect increased protectionism, and cooption of Pakistan into the new IOTA (excluding India). Dems will go for a more sophisticated policy than the with us against us kind of Republican policy. They will try to influence Iran without abandoning the Obama treaty, mix up India and Pakistan in a tangle, try to engage China in a more complex trade alliance and win win situations, as well as spend money more on health than on armaments. In such a situation, the Chinese side will gain more and more strength and wily players like Pakistan will gain more than stupid countries like India. The remarkable restraint shown by Obama with the Russians will continue in an attempt to wear out the Russian economy.
Its all based only on elections. I expect Democratic win.
UK. The euro vote is again crucial to decide on what will happen. Economics is now irretrievably mired in politics and all predictions are off until the vote is in. I expect that UK will not join the Euro and will ply its course with greater link to the Americans rather than Euro. Current problems seen in Euro zone do not inspire condifence and the English are far too clever to seek short term gain with long term pain. Present course of staying aloof with independent currency has worked beautifully for them and I see no reason why they will change plans.
Europe.
Euro QE to continue. Rates remaining low to negative. Economy middling.
Bund 0.5 to 0.8. Dax 9000-12000
UK 10 year Gilt 2%. FTSE 5500-6500
Euro static
Japan static with Nikkei 17000-20000 and static Yen
China
This is a big problem. The outcome depends on whether there is active currency war with USA or not. I expect 60% that China will prefer not to rock the boat. But 40% they might. It all depends on how the Shia Sunni war plays out. If the Russia China Shia Axis takes off exponentially, with Assad destroying all opposition and taking over the rest of his country and the Iraqi forces shifting allegiance to the Shia Axis – and conquering the Sunni areas – and the Kurds remaining strong and weakening Turkey – then USA will unleash its currency war (mainly if Republicans win). Aggressive Fed tightening will push dollar index to 150. Yuan will collapse to below 10 to the Dollar. Ruble will collapse. Oil will be less than 20 dollars. Gold will be at below 800. China and Russia will go into a bad recession. A proxy war with higher US commitments will attempt to push back the Shia Axis starting off the Second Cold War.
If China prefers not to rock the boat, we will still see a few banking failures, Chinese recession, Yuan weakening to about 7.5 at least if not more and major economic disruption. Chinese stocks falling or flat, real estate falling or flat, yields falling.
Predictions based on Democrat win and a sedate Chinese policy are:
Shanghai Comp 2500 to 3200
HangSheng 18000 to 22000
Chinese short term rates 3 to 5%
Yuan 7 to 7.5 to the dollar
Gulf
Gulf will be in recession. This will have major consequences for Indian Expats. A lot of them will return while the outflow will reduce. Countries like Dubai and Abu Dhabi will see expansion of non oil economy and hence emigration might stay high but Saudi, Iraq, Kuwait, Oman, Iran will send back a lot of people. Their return will boost India’s local economy.
The gulf Shia Sunni war will continue. Already Saudi are offering undercut oil to Iranian customers. A proper treaty alliance of India with Saudi under American guarantee is the correct step in trade policy – India should abandon Iran and go with the American policy. However if it persists with Iran or tries to make Chanahar a go without American help – then our foreign policy is doomed and we wont gain anything but lose our expat remittances.
I expect a major rout for the ISIS by middle of 2016. Basher Assad will emerge victorious. A major Iraq problem between Americans and Shias is likely after that – I expect increased Chinese presence in Iraq, increased Russian presence in Syria and a loss for the American Saudi efforts. However, despite this, for trade benefits India should side with Americans and Saudi because maximum expat workers are in Sunni lands. It is time to get decisive and chose our friends properly with military cooperation treaties.
India
Politically, all depends on Republican vs. Democrat win.
Possibility of India joining the Transpacific partnership increasing. Modi will definitely join the US in any Cold War 2 under Republicans. But if the democrats win I don’t see much progress in any Indo US alliance.
The possibility of the Indo Gulf Trade Federation is in ruins due to the Shia Sunni war. If Cold War 2 develops, then Indian Ocean Treaty Alliance as a counter to the Silk Route is possible. India under Modi will definitely join any such allicance despite opposition from communist congress socialists etc.
Indian Internal Politics: Nothing much
Indian Economy. The govt has not demonstrated capability in economy management. Middle of the road performance is all we can expect. Optimistic expectations are dead.
Tax cuts: Jaitly will reduce 1% at least since he has given road map. However I am not hopeful of any roll back of cess or Petrol excise duty. No question of aggressive tax cuts in this regime.
Disinvestment: Low expectations. Most commodity companies will get low valuations under such recessionary conditions. Govt is now in a strait jacket. They did not sell when they could and now it is not possible to sell.
RBI. I expect Rajan to be replaced. I do not expect more than 0.25% cut from Rajan until he goes. We can however hope for two 0.25% rate cuts after he has gone after Sept 2016 until Jan 2017.
10 year gilt 7% is ideal but I expect 7.25 by year end at least.
Rupee. Slow depreciation in line with dollar index. I expect at least 70 to the Dollar prior to the US election results. After that depends on results.
Real Estate. Current prices will stagnate. Select locations should see firming up of prices. Mainly commercial office plates should show good performance. Most real estate companies likely to focus on commercial rather than residential. Top location for performance by commercial realty will be in Mumbai, Chennai and Gurgaon. Within Mumbai, commercials will do well in peripheral locations like Thane and New Bombay.
Residential will see stagnation. Best performance will be in Mumbai and Chennai. Bangalore will stagnate. Gurgaon will stagnate or fall a bit in SPR and GCX since prices already quite high and increased supply will continue. NOIDA should fall a bit too as the increasing deliveries add to supply.
Within Mumbai, the best performing residential location will be Bhandup, Kanjurmarg, Chembur, Thane.
New Launches: No new locations will come up. Launches in the peripheries of Mumbai will keep happening with a few projects every six months. NOIDA, Gurgaon and Bangalore will see very few launches and only existing inventory will keep changing hands.
REITS: There is a 50% change of tenement REITS getting formed this year in Mumbai MMR under new govt. This possibility is increasing because the economic conditions demand it and industrial revival without solving housing problem is impossible. The Panvel New Airport region might form the nucleus of this policy for tenement REITs.
Real estate investors should look at private equity in commercial realty. If Tenement REIT gets formed it is second best investment. New investments in residential should be avoided if possible, but if one has to make them, best location is Mumbai and Chennai. Areasof Mumbai I have already listed. Expected returns from property investment are nil in 2016 since prices will stagnate but it is a good entry time for long term investors for 10 to 15 year hold times.
Real Estate Long Term: In view of governance failure, expectations from stocks are getting lower. In such a situation, real estate is becoming a better investment destination than it was in 2015. A lot of people have burnt their hands with stocks in 2015 and these people are likely to view a return to their favourite investment destination of real estate in favourable light. In view of expected currency depreciation in long term – again, real estate is becoming more attractive. In dollar terms we have already seen a 15% fall in prices. Another 15% fall in dollar terms will again make NRI look to real estate. A lot of Gulf people will return and this will boost prices in Mumbai in long term of 3-5 years as finance pros return from Gulf.
Stocks:
The real question for 2016 is FD or stocks. In 2015 I voted for stocks and was wrong. In 2016 I again vote for stocks but with lesser margin of conviction.
Equities need four things to perform – 1. Rate cut 2. Tax cut 3. Disinvestment 4. Investment led growth with deficit financing.
Rate cuts do not look possible from Rajan but might come from his replacement. As the recession takes off, situations might get alarming. A clever governor would have seen the alarming conditions and anticipated it. Unfortunately we are cursed with this Rajan who is unable to see anything. So after the next quarter results which are likely to be very very dismal, he might be forced to cut rates – but only another 0.25% is likely. It is perhaps better that he doesn’t cut early and then is forced to cut in a big way with 1% reduction. Otherwise the peanuts offered up by 0.25% will be too inadequate to make any difference. It is important to realize that the NPL situation of banks and loan defaults by infrastructure companies is the fault of the RBI. These loans were taken when the RBI had lowered rates. Obviously if people take loans at 7% and then RBI demands 14% interest on that loan – nobody can make enough money to pay such high rates. The solution for the NPL problem is therefore with RBI. If it lowers the rates, exact same loan will start performing again. Banks will be out of trouble, companies will be out of trouble and the country will be back on the path of growth. It is wretched and perverse of the RBI to screw people who were not responsible for the problem – RBI itself is responsible for he problem. Just because of a few bad eggs gaming the system, RBI is throwing the baby out with the bathwater. However it seems unlikely that RBI will mend its ways unless a much worse crisis arrives – or if Rajan is replaced.
Tax cuts also seem impossible from Jaitley. He seems determined to push us into recession – with govt that says it will spend but only on roads which give results after 5 years – and taxing us into a recession to do so. Power we are already in surplus – we produce more electricity than the Indian people have money to buy – so until Indians get jobs and improve productivity, they cannot consume what we already produce. How can we get jobs unless govt cuts taxes? Repeatedly the excise duty on petrol is being jacked up. Instead of giving money to the people by petrol price cuts, which will boost demand elsewhere – govt is eating the money with nothing to show for it.
If all our corporate keep bleeding like this – how will we grow? There will be nothing to tax – govt should have been spending more, but by deficit financing and not by such high taxes. Without tax cuts, there is no hope.
Disinvestment. The purpose of divestment is to jettison already running companies to free up capital for new companies – until govt understands what is disinvestment, it will never do it properly. Air India is already existing. Sell it. Use the money to set up a new tier 3 city airline – we will have 2 airlines then instead of one, both Air India and the Tier 3 airline – then sell the tier 3 airline and make some other (say airport) company. That is the way to incubate start ups via govt – set up the company, sell in capital market, re-use the capital for a new start up – and govt start ups can be in big scale unlike privately funded start ups – but govt is not seeing any of this. Allow private trains by demerging the railways, sell BSNL and MTNL, sell all PSU, sell HPCL BPC, use the money to set up other companies – LNG terminals, gas pipelines etc etc. All of this will increase the amount of useful things in the country which is what growth means – more airlines, more trains, more roads with more cars. By this rationale, govt should sell at whatever is going price regardless of valuation. The commodity companies are already in the crapper and now better valuation is not possible for next 3 years. So govt should sell now – valuations be damned. But govt is trying to time the market – Jaitley has no vision.
So far the govt has shown no sign that it understands what is disinvestment. It seems straight jacketed by Swadeshi Jagran Morons of the RSS types. So any expectation of good things from Modi govt should be muted.
Investment led growth is now the main way to grow and not consumption led growth. Current 7% (or 5% old) growth rates are the best that can come from consumption led growth. So investment needs to be wooed. Peculiar pollution laws based on nonsensical understanding of automobiles, telecom law problems etc are keeping away private investment. Govt investment is too slow in take off and will not translate into results for many many years and it is unidimensional into roads.
So on all 4 main parameters on which growth for Indian economy is based, govt and regulators are found wanting. Expecting miracles from such useless managers is futile. Best we can hope is that by hit and trial and learning by burning their fingers and other body parts again and again and again, finlly these jokers will hit on the right recipe after 1 or 2 or 3 years. In other words a repeat of the Vajpayee years where the learning curve was very very steep and only in last year was India Shining.
My predictions for India Economy and markets by Dec 2016
1. RBI rates 6% with 0.25% from Rajan and 0.5% from his replacement
2. Long term 10 year yield 6.5 to 7%
3. Economic growth 5-6% only (based on new numbers) and based on poor results from commodity companies and real estate
4. Tax rates (corporate) cut by 1% in budget 2016
5. Petrol excise kept high
6. Infrastructure companies middling performance based on capital inadequacy to take on new road projects
7. Disinvestment target met – 20,000 crores only for next FY
8. Sensex 35000 (if tax cuts and rate cuts materialize as expected above)
9. Nifty 10,000 based on same premise.
10. Higher Nifty and Sensex if tax cuts more than expected.
11. If rate and tax cuts are less than expected then flat markets.
12. Real estate stagnant
13. Gold 25000 around about
14. Rupee 67 to 70 to the dollar
All predictions are to be seen at the time of US elections and not for calendar year end – since that event carries great significance.
Asset of the decade (2016 to 2026) = Stocks
Asset to avoid for the decade = Gold
FD and Real estate should be middling to OK
Asset of the next 5 years = stocks
Asset to avoid for next 5 years = gold
FD and real estate should be OK
Asset for the next year = Stocks and FD (close call)
Asset to avoid for next year = gold and real estate
Asset allocation to aim for is Stocks 60%, FD 20%, Real estate 20%
Incremental earnings coming during 2016 targetted for savings (for existing portfolio of whatever composition) can go to 50% stocks and 50% FD for conservative investors and 100% stocks for aggressive investors.
Existing portfolio – hold real estate. Hold stocks. Maturing FD can be put into stocks especially after market finishes falling. Gold can be sold if not already sold.
Equity model portfolio remains largely same as last year except replace BSL global real estate fund with ICICI FMCG Fund (to increase focus on FMCG esp ITC which is 40% of the fund)
Portfolio recommendations for 2015 to 2018 (4 year recommendation and 4 year hold)
Size of portfolio 100
1. PPF 10 (NAV on 1.1.15 = 10)
2. FMP 10 (NAV on 1.1.15 = 10)
3. Direct equity 25
a. Pidilite industries 5
b. HDFC bank 5
c. Asian paints 5
d. Ramco cement 5
e. LIC housing finance 5
4. Funds 55
a. Franklin bluechip 10
b. UTI opportunities 10 (on performance watch for 2016)
c. BNP midcap 10
d. Franklin smaller companies fund 10
e. Reliance pharma 5
f. Franklin infotech fund 5
g. ICICI FMCG Fund 5
